Thinking critically about South Africa’s communications industry

I was invited to attend the Neotel-Mail & Guardian Critical Thinking Forum at the Gordon Institute of Business Science this evening. The evening’s theme was how to create a truly competitive telecommunications market. It proved to be a very interesting debate.

John Holdsworth, ECN Telecoms‘ CEO, feels the only real way to improve competition is through better regulation. The EC Act was intended to create a legal framework supported by regulations. Unfortunately none of the regulations needed to create a more competitive market have been drafted and passed yet. ICASA doesn’t have a “bark, let alone a bite”, he said. The new Department of Communications seems to be our best chance for an improved market. ICASA risks being revamped if it doesn’t perform. What needs to be done is a chapter 10 study in terms of the EC Act. ICASA is composed of political appointees and not people who understand the industry.

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Denis Smit, from BMI-Tech, started by saying that the most important recent development is the introduction of political will in the new administration. We need a “general” to take on powerful vested interests and big corporates in the Communications industry. We have also seen the Competition Commission start to get real teeth at the same time that we see a growing belief that the current business environment is “too cozy” and needs to be shaken up a little. Smit says there is a very strong political will to make substantial changes to the communications industry. This political will is key to dealing with the ICASA bottleneck and these powerful vested interests and big corporates.

Mlindi Kgamedi General Manager in the Department of Communications‘ Director-General’s office was up next. As much as the DOC wants to address the industry, it doesn’t want to stifle competition. It is looking at the necessary resources for bodies like ICASA which will be coupled with new levels of accountability and responsibility to ensure performance. In response to Aki’s question about whether ICASA needs more money, he said money isn’t the only issue. He went further and said that if ICASA could present a compelling business plan, money wouldn’t be an issue.

Zolisa Masiza from MTN was previously an ICASA councillor (that elicited a chuckle from the audience). I didn’t make out much aside from comments about commercial incentives for MTN to invest in a more developed infrastructure.

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Angus Hay differed from Masiza and said we are beginning to see real infrastructure competition starting with international fibre becoming available and competition for international capacity leading to a drop of pricing (80% from about 2 years ago). Neotel sells on the SAT3 and Seacom cable and finds there is real competition in the market and the prices available are substantially lower than they were a few years ago. There are currently 2 national networks (Telkom and Infraco with other networks collaborating on a 3rd network) and the area where there hasn’t been much movement is the local loop which Hay says is a big challenge. Networks find that competition has driven prices down to a point where there is little return. The networks need incentive to build local loop links.

Voice termination rates on mobile networks amount to a “natural monopoly” and active intervention is required here. One example of this is the recent interconnect rates intervention. We also need intervention on issues like geographical number portability, local loop unbundling and more. Neotel has spent a “couple billion” on infrastructure. Its budget for infrastructure is around R10bn.

Masiza responded by saying there is little incentive to build out capacity between national, metro and local network layers. He sees national distance and metro areas as critical but there isn’t enough capacity to support investments to beef up infrastructure.

Holdsworth doesn’t see any real infrastructure competition going forward. We are not going to see another Telkom. What we need is services competition. Telkom has the national copper/fibre network and Vodacom has a massive mobile network. Major networks must be required to share their infrastructures at reasonable rates. Telkom “cooks the food and you have to eat it”. Telkom has no need to innovate on its network so we are stuck with 384kbps/512kbps etc. Instead, if Telkom was forced to share its infrastructure, providers could take advantage of aspects like the local loop to provide faster ADSL 2+, for example.

Smit pointed out that millions of South Africans risk never accessing broadband and this is unacceptable politically.

Hay said that unbundling the local loop is not a panacea. Only around 24% of SA households have a landline. Wireless is increasingly important with 96%-97% of South Africans estimated to be covered by some wireless network. We need a combination of wired and wireless networks to give South Africans better access to communications networks.

Smit raised a concern about current legislation and how portions of it are badly worded. Legal processes are slowing ICASA down. Aki suggested to Denis that it may be time to wipe the slate clean with ICASA and start again. Kgamedi was reluctant to take a stance against ICASA because he sees it as a valuable tool which has positive accomplishments. The DOC is looking at amending current legislation like the ECA and the ICASA Act. Masiza pointed out that ICASA had little time to reorganise itself when the framework shifted to the ECA. It really required far more time to plan for the shift and it didn’t have that time.

ICASA was given a directive to address the local loop in 2007 and hasn’t implemented this directive (together with many others). It sounds like Masiza is saying that a balance needs to be struck between managing ICASA better and not interfering unduly in its processes. Holdsworth pointed out that ICASA could take advantage of the courts where it has good arguments. ICASA needs to grow a backbone and take on the bigger players. Smit reminded the audience that the government is still a major shareholder in Telkom which stands to lose the most from local loop unbundling. This places the government in a very difficult position because its goals to cultivate a more competitive environment and maximise its Telkom interest are incompatible. ICASA runs scared because it keeps getting beaten in the legal system because it is outgunned and its opponents keep dragging ICASA through a sluggish court system.

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An audience member painted a picture of a regulatory system which has a very shaky and problematic foundation beset with conflicts of interest, inadequate regulatory frameworks and powerful and conflicting vested interests. Neotel, as a new entrant to the market, has a degree of uncertainty when dealing with ICASA. That being said, ICASA’s own framework is problematic and needs to be clarified and beefed up to truly empower ICASA as a regulator.

Holdsworth and Smit pointed out that Telkom is recognising that its wholesale business is going to grow in the coming years as its retail business begins to shrink. Aki raised the spectre of Telkom collapsing as the local loop is unbundled but Holdsworth stated that Telkom really has a world class network and implied it would find itself becoming more of a wholesale provider than a retail provider.

Hay raised the issue of spectrum and said spectrum has real limitations and there is no long term planning for spectrum beyond the next decade or two. What we sorely need is a better sense of where South Africa is going and what it needs.

“Deny, defend, delay” is Telkom’s, Vodacom’s and MTN’s strategy, said Holdsworth. Telkom’s results show the impact of VOIP services and other innovations on Telkom’s business model.

The consensus is that the Minister is proving himself to be a breath of fresh air in the South African communications industry. We seem to be on the right track from a political and policy perspective. It comes down to ICASA to regulate the industry. It is also important to have better coordination in governing structures to better implement government’s policy directives. That being said, the politicians also appointed the ICASA board but it does sound like the new administration is going to hold ICASA to account for its performance.

Holdsworth pointed out that it costs ECN three quarters of a cent to route a call from Joburg to Cape Town over Telkom’s network. ECN hands over to MTN/Vodacom/etc which charges ECN R1,25 and the customer R2,00. Very telling!

I had an opportunity to chat with Mlindi Kgamedi after the debate. I mentioned to him Finland’s recent move to give all citizens the right to access to broadband. I have been a believer in a similar right in South Africa for several years. He commented that this is something the Department of Communications is working towards and that is terrific news for South Africa!

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